Pricing the Internet Geoff Huston

Issues Covered Cost Identification Pricing Policies

Cost Identification zCost elements for an Internet Service ytechnical staff yoperational and support staff yadministrative overheads ycapital equipment ydata transmission costs xdomestic line leases xinternational line leases xISP transit costs

Cost Profile - non US zTypical recurrent costs xnational backbone carrier xnon-US ystaff & admin 10% ydomestic leases 30% yinternational leases 60% yinternational transit <1%

Cost Profile - non US

Cost Profile zUS profile has proportionally: ylower international lease cost ($0!) ylower domestic lease cost yhigher relative support staff cost

Cost Profile - US ztypical recurrent costs xaccess provider xnon-backbone xnon US ycustomer support and marketing 50% yaccess infrastructure 20% ydomestic access to backbone 25%

Cost Profile - US

Cost Profile - Backbone Net zDetermining the unit cost of passing traffic over the network ysum of unit costs for traffic over each circuit ynormalised by average end to end traffic profile

Cost Profile zdetermining the unit cost of passing traffic over a circuit ybidirectional or unidirectional? yline occupancy pattern (peak to average) yaverage sustainable line occupancy Dial server usage pattern Business usage pattern

Cost Strategy yavoid congestion on the circuit as a priority x(actual unit cost of delivered data) Average Traffic Level Unit Cost 20% 60% 40% 80%

Cost Strategy zleased circuit cost ycircuit lease cost must be fully defrayed at average circuit occupancy of 55% for a stable operating network. yhigher average occupancy is possible at the cost of peak load inefficiency ylower average occupancy is under- subscription of the circuit resource.

Worked Example z2Mbps circuit - lease cost of $150,000 per month zunit cost of data is 28.2 cents per Megabyte

Worked Example z2Mbps can deliver 663,552 Mb in each direction per month zTotal possible traffic level is 1,327,104 Mb in both directions z40% target line occupancy is 530,842 Mb z$150,000 divided by 530,842 is $ 0.28

Worked Example zInternational line has double the cost yyou cant get the other side to pay! zFrom previous example the unit cost of data is 56.4 cents per Megabyte

Cost Profile Example TypeProportionunit cost%total cost of traffic Intnl % Dom % Local %

Cost Strategy zminimise International Lease costs ytariff structure of decreasing unit cost with xlonger lease commitment xhigher volume circuit yNote that the Minimum Investment Unit (MIU) of international cable systems is an E1 bearer xmajor cost break leading to E1 size xreduced cost break thereafter

Cost Strategy zquantity over quality yFrame Relay for lower speeds zquantity over diversity

Cost Strategy zterminate at the cheapest useful full circuit location yhigh volume termination locations are cheaper ydistance is not a significant factor zmaximise useful circuit capacity ysecondary goal yavoid the long delay pipe protocol behaviour yuse cable if marginal premium over satellite is small ytend to cable for higher bandwidths

Cost Strategy zMinimising International Lease cost is the most significant cost factor zDomestic lease cost can be significant ysimilar factors apply here as with International leases

International Access Costs zConnection Options yConnect to upstream ISP xImport default route xContract ISP to advertise your routes to Internet xCost highly variable xQuality of default can be variable xPurchase carefully!

International Access Costs zConnect to an exchange point yCan advertise your routes to all exchange peers yCan import all announced routes to your network zThis is not the same as importation of default yYou need to purchase transit at the exchange point in order to reach other exchange points ysame conditions apply

Costs and Revenue zThis is a growth industry zCost containment is subsidiary to revenue growth zEffective marketing leads to yhigher revenue ygreater purchasing power ylower unit costs

Client Pricing zObjectives yservice provision ycover costs? ygenerate revenue? yconstrain / encourage use? ycompetitive positioning

Revenue Generation zconstrained by policy objective of the network zinitial revenue levels need to be offset against future growth potential within competitive environment zmaintain revenue levels in line with investor expectation

Constrain / Encourage Use zMust constrain use within a fixed funded or subsidised environment yunrestricted growth of subsidised environment implies fundamental business failure within a cross-subsidised environment zMust constrain use if increased use does not generate increased funding and / or revenue

Constrain / Encourage Use zShould encourage use within parameters of constant or improving yincome ydelivered quality of service yunit cost of service provision

Competitive Pricing zMust set pricing at a level which is ycomparable to competitive networks yset by xdelivered service profile xquality of delivered service xinvestment profile xdesired return on investment yOpportunity pricing is inherently unsafe as a longer term strategy

Internet Service Pricing zUnit pricing is variable against target congestion level zThe discriminent is quality zVariable perception of value of quality price of services service degradation

Pricing Elements yAccess yTime & Duration yVolume yDistance Retail Price = f (Access) + g (Time) + h (Volume) + j (Distance)

Access Price zNormally varied by bandwidth zIf used as sole price parameter then the provider relies on averaging across the client base ySophistication of client base implies increased usage at constant price yMust be offset by constant growth yie access pricing must be offset by increased marketing costs and / or access to lower unit costs of bandwidth

Access Pricing zflat fee based on bandwidth ywidely used (well, not so now) ypredictable billing for the customer ylow administrative overhead for provider yincreased marketing costs for provider yno traffic shaping xno incentive for shared caching to offset intnl lease costs

Time-Based Pricing zonly applicable to dial-up operation zscales with growth in dial-up market zwidely used for dial access ymonthly access schemes are generally risk prone to over consumption yper unit time charging difficult to market as the market matures ymonthly access plus timed overflow very common

Volume Pricing zcannot measure calls zSent or Received traffic? zSent Volume yreduces incentive to populate network with services (information provider pays to pass information to receiver) zReceived Volume ymatches ftp & html usage ypoor match for & telnet ylow incentive for cooperative infrastucture xprovider undertakes all dns, named, caches, etc

Volume Pricing zDecision on Volume unit ytens of gigabytes (virtual access bandwidth) ymegabytes (high sensitivity) zTraffic shaping by time of day ypeak / off peak pricing ycongestion / burst pricing

Volume Pricing zUnit price on received gigabytes per month zOff Peak volume discount ? zincreasing adoption within the Internet zscaleability zallows increasing revenue with increasing use to ensure constant delivered quality yi.e. allows constant service integrity

Distance-Based Pricing zTypically applied to volumes measured on a source to destination basis: ylocal switching ydomestic transit yinternational transit zrequires traffic sniffing (scaling issues) zweakly manageable within the client environment

Pricing Conclusions zNo pricing (funding by external agencies or by multilateral client agreement) is typical starting position, but is very weak zAccess Pricing is effective starting position, but is difficult to produce a stable outcome under growth pressure zVolume Pricing is stable, but requires careful positioning within current / future competitive market

Discussion zMarketing Internet Services yCost containment vs revenue growth ymarketing as a measure to support pricing strategy yplan ahead on demand levels, revenue and expenditure zIssues of marketing capabilities vs marketing data switching services

Discussion zPricing strategies in a competitive marketplace zWhats the objective? zWhats the regulatory position?